May 24, 2005

Open Letter to Senator Grassley

Dear Senator Grassley,

An article in today's New York times with the header "Repeal of Alternative Tax Gains a Top G.O.P. Backer," describes your position to repeal the Alternative Minimum Tax (AMT). I'm confused about why you'd advocate for this policy change and hopefully you can help clear a few things up for me.

As you must know, the tax was first enacted in 1969 as a type of alternative personal income tax. Basically, too many high income people were claiming too many federal deductions, exemptions, and credits. These wealthy Americans were able to reduce the amount they paid in taxes so much - that many of these high income individuals did not pay any taxes at all.

Congress established this alternative minimum tax to make the tax system more fair - to ensure that wealthier taxpayers could not get away with paying no taxes at all.

This is where your colleagues goofed a bit...they didn't index the AMT properly to make sure that year after year only wealthy people pay the tax. So now in 2005, we see that more and more middle income people are paying the AMT. This goof, combined with the 2001 & 2003 Bush Tax Cuts, means that even more middle class Americans are being forced to pay a tax that was never intended to impact them.

It's my understanding that instead of fixing the AMT (which would also mean lessening the tax burden on the middle class) you'd be in support of repealing the tax all together -- returning us to the pre-AMT world where the wealthiest Americans paid no income tax.

I can't close without saying that repealing the AMT would also be quite pricey. Estimates are that this tax cut would cost $600 billion by 2015.

I guess I'm just confused about two things:
1) Why "throw the baby out with the bath water" by repealing the AMT instead of simply fixing what's wrong?

2) In a time of war and enormous need - why pass another tax cut?


PS - You might want to check out this latest analysis about the repeal of the AMT by Citizens for Tax Justice.


At 4:14 PM, Blogger MarylandPolicyBlog said...

Dear Kelly

This is a fine letter, with some really good questions. It looks like the Senator wants to "fix" the AMT in the same way that they "fixed" the estate tax a few years ago.

Have you forwarded it to anyone on the Senator's staff? You also might consider crossposting this on a couple of other blogs.

Steve Hill

At 4:18 PM, Blogger Kelly said...

Sure, good suggestion! I'll put it on some letterhead and send it over.

What other blogs do you suggest?


At 5:24 PM, Anonymous squarestater said...

What's going to happen to the states? How badly are we going to get screwed if they repeal the AMT rather than fix it?

By the way, I would suggest watching Angry Bear and Calculated Risk (as well as MaxSpeak and Brad DeLong) for posts on the AMT. If I see one, I'll put in a plug for TT.

At 10:27 AM, Blogger Kelly said...

Hey Steve,
The letter to Grassley has been over to his office - I'll be sure to post the response (if any) I receive).

At 3:44 PM, Blogger Kelly said...

Hey Squarestater (and others),

I'd be interested to hear your thoughts on this question.

Seems like more people paying the AMT would result in fewer taxpayers writing off their state/local income taxes on their federal tax forms and that this would be particularly troublesome for high tax/higher income states. Lower tax/income states wouldn't see as much of an impact of the growing AMT because fewer of their taxpayers would be subject to this tax.

Right now, wealthy tax filers who don't pay the AMT can write off their state/local taxes when they itemize on their federal forms. This means that their federal taxes are actually lowered because they are able to take their state and local taxes as a deduction.

If these taxpayers are no longer allowed to itemize and instead are now paying the AMT, they can't take advantage of the "offset." So, this policy shift serves to increase federal taxes on taxpayers who may already be paying high state taxes, while simultaneously disallowing future deductions for state tax increases that are targeted to the higher income. It's worth noting that this could have a disturbing impact on progressive tax policy, in general.

Also, it's interesting to think of this AMT debate in the political context of red states having (on average) lower income and lower taxes, compared to blue states which tend to be both higher tax and have residents with higher incomes.

At 10:18 AM, Anonymous squarestater said...

I think my premise was wrong. I was thinking that the AMT somehow affects AGI, the jumping off point for state taxes, but it's after the fact so repeal of AMT won't have the direct effect of lowering state taxes.

An interesting thing I've been thinking about though is what is going to happen to all of the middle class people who are on the precipice of the AMT and who have these huge mortgages. If the AMT hits them, that's going to be pretty big, right? Will that lead to pressure to eliminate the AMT or raise the threshold? My sense is that there is too much money coming from the AMT and no one really understands it so a quick fix (ie, raising the threshold so the middle class doesn't get pissed off) may be more likely than the repeal. But then applying logic in this environment is an unwise move.

At 10:58 AM, Blogger Kelly said...

I sat in on a Congressional hearing around this time last year when the AMT was discussed and one of the witnesses testified that the AMT was basically bankrupting her family - her story was actually quite sad.

Clearly middle-class people with large mortgages weren't supposed to be hit by this. Nothing has developed to show that this hearing had any impact - but people are obviously talking.

Yes, seems like it would make sense to just reform, and not repeal the AMT - but as you say this is perhaps the worst environment in which logic could prevail ...and then we come full circle with the knowledge that the Chairman of the Senate Finance committee is advocating repeal.

Eventually something will have to give though - the current AMT is clearly in need of real reform.


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